Question of the Day

Whose side of the story do you believe?

On Oct. 5, George W. Bush made abolition of the corporate alternative minimum tax (AMT) a key element of his economic stimulus proposal. Congress should "eliminate" the AMT, he said, in order to encourage capital investment by corporations.President Bush's proposal is something Congress should have done long ago, but has resisted for shallow political reasons. Indeed, the AMT exists only for political reasons, since it actually raises no net revenue for the federal government. Yet it still imposes severe economic costs that inhibit investment and diminish the value of proposed investment incentives, such as shorter depreciation schedules.The AMT, in its current form, was imposed by the Tax Reform Act of 1986. In many ways, it was a law directed at one company: General Electric. In the early 1980s, GE was one of the most aggressive in using tax provisions, such as safe-harbor leasing, to reduce its tax liabilities practically to zero. The idea that one of America's largest and most profitable industrial corporations could legally avoid paying any federal income taxes was considered a scandal. The AMT was designed to ensure that every profitable corporation would have to pay some taxes every year.The AMT is like a completely separate federal tax system parallel to the corporate income tax. Companies calculate their taxes both ways and pay whichever yields a higher tax. Under the regular income tax, they get the full benefit of various tax incentives, such as accelerated depreciation, which are taken away under the AMT. However, the AMT tax rate is only 20 percent vs. 35 percent under the regular corporate tax.This means companies affected by the AMT have a disincentive to make capital investments once it kicks in. This is important right now because the economic slowdown we are experiencing is primarily the result of lower capital investment by corporations. Between the second quarter of 2000 and the second quarter of 2001, real gross private domestic investment fell by $136 billion, from 19.5 percent of gross domestic product (GDP) to 17.8 percent. By contrast, real personal consumption has risen by $201 billion and is unchanged as a share of GDP. Thus, the fall in investment explains almost all the decline in real GDP growth.It would do little good to stimulate additional investment by shortening depreciation schedules, however, because larger depreciation allowances would trigger a higher AMT payment by many corporations. In other words, unless the AMT is abolished, much of the value of increased investment incentives will be offset by the AMT, resulting in less additional investment than would otherwise be the case.One of the quirks of the AMT is that its liabilities rise during recessions. That is because the accumulated depreciation from past investments triggers an AMT liability for many companies when their profits fall due to lower sales. Thus the gross AMT rose from $3.5 billion in 1989 to $8.1 billion in the recession year of 1990.But the law also allows corporations a credit for past AMT payments in years when they have no AMT liability. These credits have now risen to the point where they exceed the gross AMT, meaning that on net the federal government loses revenue from the AMT. Since 1995, AMT credits have exceeded gross receipts each year, meaning that the government had negative AMT revenue. Between 1995 and 1998, it took in $2 billion less revenue than if there were no corporate AMT at all.Net AMT revenues have fallen steadily since 1990. The last year the government got positive net revenue was 1994, when it got just $1.3 billion, less than 1 percent of corporate tax receipts and .01 percent of all federal revenues.This analysis suggests two things. First, the AMT is pro-cyclical. That is, it exacerbates the business cycle by raising corporate taxes during economic downturns and lowering them during upturns. As a consequence, it reduces capital investment during recessions and increases it during expansions. The effect is to exaggerate the boom-and-bust economic cycle.Second, because the AMT raises no net revenue, it could theoretically be abolished at no cost to the government. The problem, of course, is that companies with unused AMT credits would scream bloody murder. But even they might be willing to accept some reduction in those credits in return for complete abolition of the AMT. For example, they might lose credits not used within a certain number of years, or get a declining percentage of unused credits.President Bush is on the right track in making AMT repeal part of his tax stimulus plan. It is discouraging capital investment at a time when we need more of it.